The Civil Law Consequences of Corruption Under the UNIDROIT Principles of International Commercial Contracts: An Analysis in Light of International Arbitration Practice
© Springer International Publishing Switzerland 2015
Michael Joachim Bonell and Olaf Meyer (eds.)The Impact of Corruption on International Commercial ContractsIus Comparatum – Global Studies in Comparative Law1110.1007/978-3-319-19054-9_1717. The Civil Law Consequences of Corruption Under the UNIDROIT Principles of International Commercial Contracts: An Analysis in Light of International Arbitration Practice
(1)
University of Münster, Münster, Germany
(2)
Cleary Gottlieb Steen & Hamilton LLP, Main Tower, Neue Mainzer Straße 52, 60311 Frankfurt am Main, Germany
(3)
Cleary Gottlieb Steen & Hamilton LLP, Via San Paolo 7, 20121 Milan, Italy
Abstract
At its 90th session (9–11 May, 2011), the Governing Council of UNIDROIT adopted the 3rd edition of the UNIDROIT Principles (2010 Principles), whereby it introduced a new section devoted to the issue of “illegality”. This paper analyzes the civil law consequences of corruption in international commercial arbitration under the new section on illegality in light of current arbitration practice. After drawing a distinction between contractual and restitutionary remedies, the authors concluded that, under the 2010 Principles, while parties to a contract tainted with corruption would still be denied any contractual remedies in most (if not all) of the possible instances, the same is not true with respect to the right to obtain restitution of what they have paid or rendered under the illegal agreement. In fact, the new section on illegality responds to concerns that have become more compelling in international commercial transactions and which must be recognized by international arbitral tribunals.
17.1 Introduction
The UNIDROIT Principles of International Commercial Contracts (the “Principles”)1 represent a private codification or “restatement” of the general part of international contract law.2 Regarded as “a significant step towards the globalization of legal thinking”3 and as “a particularly authoritative and valid expression of the lex mercatoria”,4 the Principles have been increasingly used, notwithstanding their non-binding nature, by parties when drawing up their contracts and by courts and arbitral tribunals for the settlement of disputes.5
At its 84th session, the Governing Council of the UNIDROIT, convinced that “work for the Principles of International Commercial Contracts ought to continue”, set up a Working Group with the task of preparing a new edition of the Principles, and proposed a list of topics to be included.6 These topics included conditions, plurality of creditors and debtors, and illegality.7
At its 90th session, the Governing Council of UNIDROIT adopted the 3rd edition of the UNIDROIT Principles of International Commercial Contracts (“2010 Principles”), whereby a new Section III has been introduced under Chap. 3 in order to deal with the issue of “illegality” (“New Section on Illegality”).
This paper analyzes the civil law consequences of corruption in international commercial arbitration under the New Section on Illegality in light of current arbitration practice. Specifically, after a brief account of the relevance that the UNIDROIT Principles may have in international arbitration proceedings (Sect. 17.2) and the content of the New Section on Illegality (Sect. 17.3), the following issues will be addressed in turn. First, preliminary issues such as the power of arbitral tribunals to address corruption claims (Sect. 17.4.1), and admissibility of claims under a contract tainted with corruption (Sect. 17.4.2) will be discussed. Second, the parties’ ability to exercise contractual and restitutionary remedies in cases involving contracts either procured by corruption or providing for corruption will be addressed (Sect. 17.4.3). Finally, the provisions contained in New Section on Illegality will be analyzed with a view to assessing whether they may affect the way in which arbitral tribunals currently address the civil law consequences of corruption (Sect. 17.4.4).8
17.2 The Relevance of the UNIDROIT Principles in International Commercial Arbitration
The Preamble of the Principles lists the circumstances in which the Principles may apply (or, at least, be taken into account) in the context of international commerce. Specifically, the Principles: (i) apply where the parties expressly provided so in the agreement9; (ii) may apply where the parties subject the contract to unspecified principles of international trade,10 or the agreement is silent as to the applicable law; and (iii) may be taken into account as a means of interpreting or supplementing either “international uniform law instruments” or domestic law.11
International arbitration practice shows that, although the parties seldom select the Principles as the law governing the contract,12 arbitrators have applied them in a number of different instances. For example, the Principles have been used to:
give substance to the parties’ choice to subject the contract to “general rules and principles enjoying wide international consensus”13;
determine the law applicable to the contract absent a choice-of-law clause14;
supplement international law instruments and, in particular, the United Nations Convention on Contracts for the International Sale of Goods15; and
support the findings made in application of the domestic law chosen by the parties as applicable to the contract, especially where such law refers to trade usages.16
17.3 The New Section on Illegality
As the preparatory works show, the Working Group on Illegality initially adopted a bipartite approach, distinguishing between contracts that are illegal because (a) they are “contrary to fundamental principles”17; or (b) by their terms, performance or otherwise, they infringe “a mandatory rule”,18 and providing for different legal effects for the two categories.19
Although this bipartite approach was in line with that adopted by the Principles of European Contract Law,20 the Working Group eventually abandoned it.21 Thus, the 2010 Principles only address illegality due to the infringement of a “mandatory rule, whether of national, international or supranational origin”.22
The New Section on Illegality encompasses two articles.
Art 3.3.1 distinguishes between two types of effects that may follow the infringement of a mandatory rule, establishing that:
(ii)
where the rule is silent, the parties shall “have the right to exercise” the remedies available under the contract that are reasonable in the circumstances.24 Among contractual remedies, the right to performance or compensation, as well as “the right to treat the contract as being of no effect, the adaptation of the contract or its termination on terms to be fixed”25 may be available to the parties.
Art 3.3.2 addresses the parties’ right to claim restitution of what they have paid, “[w]here there has been performance” under an illegal contract. In particular, even “where the parties are denied any remedies under the contract”,26 if the infringed mandatory rule is silent on the effects of the infringement, “restitution may be granted where this would be reasonable in the circumstances”.27 This rule may prove to be very innovative. In fact, as the official commentary to the 2010 Principles highlights, “contrary to the traditional view that, at least where both parties were aware or ought to have been aware of the infringement of the mandatory rule”, no restitutionary remedies are available, Art 3.3.2 admits that “restitution may or may not be granted depending on whether it is more appropriate to allow the recipient to keep what it has received or to allow the performer to reclaim it”.28
17.4 The Legal Consequences of a Positive Finding of Corruption in International Commercial Arbitration Practice
Generally speaking, an arbitral tribunal is prevented from hearing and ruling on the merits of a case if it either lacks jurisdiction, or declares the claims before it to be inadmissible. So, before addressing the civil law consequences (on contracts) of corruption in international arbitration (Sect. 17.4.3), one has to determine – preliminarily – whether international arbitrators would: (i) view themselves as having jurisdiction to address and verify the merits of the allegations of corruption (Sect. 17.4.1); and (ii) dismiss claims brought under a contract tainted with corruption as inadmissible (Sect. 17.4.2).29
17.4.1 Lack of Jurisdiction
Where an allegation of corruption is raised, the first dilemma for the arbitral tribunal will be whether it lacks jurisdiction ratione materiae over the disputes.30 In the case known as the oldest international commercial arbitration dealing with corruption,31 the sole arbitrator Judge Lagergren declined jurisdiction, holding that disputes concerning allegedly illegal contracts where not arbitrable as a matter of public policy.
Specifically, even if none of the parties had raised the issue, Judge Lagergren felt that, “in the interest of due administration of justice”, he had ex officio powers to examine “the question of jurisdiction”.32 Eventually, on the basis of “general principles denying arbitrators to entertain disputes of this nature”,33 he found that “jurisdiction must be declined” in cases “involving gross violation of good morals and international public policy”.34 This was so because “parties who ally themselves in an enterprise of the present nature must realize that they have forfeited any right to ask for the assistance of the machinery of justice (national courts or arbitral tribunals) in settling their disputes”.35
According to Judge Lagergren’s findings, allegations of illegality or corruption per se render the dispute non-arbitrable and, as a consequence, deprive the arbitral tribunal of its jurisdiction to hear claims brought under a contract allegedly tainted with corruption. The rationale of his reasoning lies on the assumption that “due to the criminal element involved, those issues should be left to the State courts”.36
The shortcomings of this approach are evident. By way of example, arbitral practice shows that allegations of corruption may eventually be found to be groundless.37 In these cases, Judge Lagergren’s approach would inevitably lead to an unjustified denial of justice, or at least to a betrayal of the will of the parties, which entered into an arbitration agreement to see their disputes resolved in the agreed forum.
Furthermore, under the settled doctrine of separability, an arbitration agreement is distinct and autonomous from the contract in which it is contained.38
Therefore, even where the contract itself is invalid (eg, because it is tainted by corruption), the arbitration agreement must still be held to be valid and effective. As a consequence, allegations of corruption are currently not likely to deprive the arbitrator of jurisdiction and, hence, courts and arbitral tribunals uphold the right of the arbitrator to exercise jurisdiction in cases where allegations of illegality or corruption have been made. This is well-explained in the first Interim Award rendered in ICC Case No 4145. In that case, even though the respondent challenged the jurisdiction of the arbitral tribunal because the “agreement was immoral per se and its object was illicit”, the arbitrators eventually ruled that “the question of validity or nullity of the main contract, for reasons of public policy, illegality or otherwise, is one of merits and not of jurisdiction, the validity of the arbitration clause having to be considered separately from the validity of the main contract”.39
However, an exception to this principle may apply where voidness ab initio of the contract infects the arbitration agreement ab initio.40 Although, generally corruption and illegality issues do not undermine separability,41 there are exceptional cases (which do not include bribery)42 where illegality renders the separate arbitration agreement void ab initio, including in certain cases of (i) non est factum cases (ie, where a party claims that it signed the contract by mistake, without knowing the meaning of that signature, but without being negligent),43 (ii) forgery,44 (iii) threat,45 (iv) mistake of identity,46 and (iv) signature absent authority.47 The competence-competence principle would normally entitle a (negative) decision on separability in such instances.48
17.4.2 Inadmissibility of Claims
Even if legality is no longer considered an express jurisdictional prerequisite, it still may be seen as an implied prerequisite to admissibility, either under the applicable law or as an effect of international law informing national law. As a result, parties to a contract tainted with corruption may find themselves barred from maintaining any claims (whether contractual and or for restitution) under the contract.49 Such a bar is usually imposed under the equitable adages nemo auditur turpitudinem suam allegans (literally, no one can be heard to invoke his own turpitude) and ex turpi causa non oritur actio (literally, an action cannot arise from dishonorable cause). In other words, since an unlawful act cannot serve as the basis for action in law, the contracting party cannot seek redress through protection of substantive legal rights under a contract if it has “unclean hands”.50
For instance, in a recent case, an arbitral tribunal found that the agreement entered into by the parties had a “corruptive intent” and, accordingly, “dismissed the agent’s case on the ground that no claim is defendable in law whenever it arises from an invalid contract, affected by an illicit object”.51 According to a commentator who was directly involved in the case, this was a “clear reminiscence of the Roman adagio fraus omnia corrumpit”.52
Technically speaking, these maxims do not operate as a defense on the merits, rather, they constitute a “procedural” bar to the admissibility of a claim.
17.4.3 Voidness of the Contract and (Un)Availability of Contractual and Restitutionary Remedies
Distinct from the issue of admissibility of claims, international arbitral tribunals may assess the consequences of corruption on the merits of the case and, specifically, on the commercial contract in dispute.
In this respect, a distinction may be drawn between contracts providing for corruption and contracts procured by corruption. Generally, the latter are merely voidable at the insistence of the innocent party (but are otherwise intrinsically valid and therefore continue to produce all their legal effects), while the former are null and void ab initio.53
Arbitration practice shows that contracts entered into for “corruptive intent”54 (eg, bribing agreements providing for corruption) are invariably declared null and void ab initio, either under the applicable domestic law, or under international public policy requirements, or both.
By way of example, in a case where the parties entered into several agreements whereby “claimant, acting as consultant for defendant, would assist defendant in trying to secure saving on costs” and “in acquiring extensions of the total value”55 of a construction project, the arbitral tribunal found that the last agreement provided for corruption since it was in reality “an offensive secret commission agreement”.56 As a result, it declared the agreement “entirely null and void”,57 because it was contrary to “bonos mores” (under both the law governing the agreement and international public policy).58 Similarly, in ICC Case No 3913 of 1981, the arbitral tribunal declared the contract providing for the payment of “kickbacks” null and void because it was contrary to French domestic public policy and to international public policy.59
In these instances, arbitral tribunals, “without either party having to take any steps to set it aside”,60 will neither enforce the contract nor grant any other remedies (ie, neither contractual nor restitutionary remedies will be available to the parties).61
Instead, contracts entered into as a result of a bribing agreement (contracts procured by corruption) may be annulled at the option of one party, depending on the domestic applicable law. It follows that, if the innocent party takes action, “what was previously an existing contract is set aside” and, consequently, it cannot be enforced (ie, no contractual remedies will be available to the parties).
However, restitutionary remedies may in principle still be available. In fact, as an ICC tribunal made clear, the “avoidance of a contract must be distinguished from restitution” because “by rescinding, the innocent party seeks to set aside the contract”, while in “asking for restitution of whatever he has performed to the date of rescission, he must either make or tender restitution of that which he has received”.62 Nonetheless, arbitration practice shows that arbitral tribunals are not keen on awarding parties full restitution of what they have rendered in performing a contract that was procured by corruption. For instance, in ICC Case No 11307, the arbitral tribunal dismissed a claim for full restitution under two maintenance contracts and ordered the contractor to reimburse to the principal only the balance between the total consideration it received under the maintenance contracts and the commission it paid to an intermediary to (illegally) secure the contracts.63
17.4.4 Contractual and Restitutionary Remedies Under the New Section on Illegality
As mentioned, the New Section on Illegality deals with the effects that the infringement of a mandatory rule by the “terms, performance, purpose”64 of a contact may have on the contract itself. Where the infringed mandatory rule is silent, parties to an illegal contract (a) may exercise the contractual remedies that are reasonable under the circumstances; and (b) where the contract has been performed, may still claim restitution if it is reasonable in the circumstances, and even where they “are denied any remedies under the contract”.65
In the following two subsections, we will examine how the principles established by the New Section on Illegality may influence international arbitrators when assessing the consequences of corruption on commercial contracts and, specifically, the remedies – both contractual (Sect. 17.4.4.1) and restitutionary (Sect. 17.4.4.2) – that parties to a contract tainted with corruption may retain.
Although no arbitral awards applying the New Section on Illegality seem to be publicly available to date, the Illustrations provided by the official commentary to the 2010 Principles are helpful for our purposes. It is worth recalling that any of the considerations made below are relevant to the extent that the UNIDROIT Principles apply and no national law rules on the legal effects of illegality on contracts take precedence.
17.4.4.1 Contractual Remedies
According to current arbitration practice, parties to a contract tainted with corruption are usually denied any contractual remedies, except where the contract is procured by corruption (as opposed to providing for corruption) and the innocent party decides not to take action for its annulment. Instead, pursuant to Art 3.3.1 of the New Section on Illegality, contractual remedies may still be granted if it appears reasonable, based on the following criteria:
As to contracts providing for corruption, Illustration No 1 of Art 3.3.1 provides the following example.66 A (the “Contractor”) entered into a “Commission Agreement” with B (the “Agent”). Under this agreement, the Agent would pay, against a substantial fee, “a high ranking procurement advisor”67 of a Governmental entity to induce the latter to award the Contractor a construction contract. Commission agreements as such are illegal under the law of virtually all jurisdictions (because they infringe either statutory provisions, or national public policy standards), as well as under well-established international principles of good morals. As seen supra, an international arbitration tribunal would declare such contracts null and void ab initio. Equally, under new Art 3.3.1 of the 2010 UNIDROIT Principles, such contracts will be considered non-existent (and, therefore, be devoid of legal effect). Indeed, in the example, if the Governmental entity refused to award the Contractor the construction contract, notwithstanding the fee that the Contractor paid to the Agent, neither the Contractor nor the Agent would be granted “any remedy under the Commission Agreement”.68
(i)
the purpose of the infringed mandatory rule;
(ii)
the category of persons that the infringed mandatory rule intends to protect;
(iii)
the sanctions that may be imposed under the infringed rule;
(iv)
the seriousness of such infringement;
(v)
the knowledge that one or both parties had (or ought to have) of the infringement;
(vi)
the circumstance that the performance of the agreement may have required the infringement; and
(vii)
the reasonable expectations of the contracting parties.